Raiffeisen says its CEE units are well-capitalized

Austrian bank will loan $160 million to its Ukrainian subsidiary

By

PolyaLesova

NEW YORK (MarketWatch) -- Austrian financial group Raiffeisen International said Monday that it remains committed to Central and Eastern Europe and its numerous subsidiaries there are well-capitalized, but warned that some of the economies in the region will contract as a result of the global crisis.

"We're aware of the situation and we, of course, take it seriously, but we're not worried about the situation, because we know the region very well," said Michael Palzer, a Vienna-based spokesman for Raiffeisen (0FT4)(RAW), in a phone interview with MarketWatch on Monday.

"We define CEE [Central and Eastern Europe] as our business model," Palzer said. "The region as such is now considered as a risk for obvious reasons, as a consequence of the subprime crisis. It was a crisis that was imported by the West. But one also has to see that the region as such is not very coherent."

Countries such as the Czech Republic, Poland, and Slovakia have been affected to a smaller extent by the economic crisis, while other countries, such as Hungary and Ukraine, are going through much more serious troubles, Palzer said.

In recent weeks, market concerns have risen about Eastern Europe's economic woes and the exposure of Western European banks, such as Raiffeisen, to the region. The Eastern European exposure of Austrian banks is about 68% of Austrian gross domestic product; that number includes the exposure of Bank Austria, which is controlled by Italy's UniCredit (UCG).

At a summit of the European Union in Brussels on Sunday, Germany's chancellor rejected proposals to set up a multi-billion euro bailout fund for the region. As a result, Eastern European currencies, such as the Polish zloty and the Hungarian forint, fell sharply against the euro on Monday.

Raiffeisen's Palzer said he's not in a position to comment on the decisions taken at the E.U.summit on Sunday.

He said, however, that Raiffeisen is part of an initiative among the largest banks in the region, the so-called system banks, to alert decision-makers in the west about the need to support Eastern Europe.

"Now we see the danger that CEE will fall back again [compared to] western countries in terms of growth and that's what we want to make aware [to decision makers]," he said. "A lot of portfolio investors rerouted their investments to more stable economies."

"Some of the CEE countries will show real growth this year," he said. "Some of them are hit by the recession no doubt. For some, the catch-up process [with the west] will continue at a slower pace, but for some it is really interrupted and the economy will contract."

Ukrainian unit gets loan

Raiffeisen Bank Aval, the second-largest bank in Ukraine, said Monday it will receive a $160 million subordinated loan facility from Raiffeisen Zentralbank, which owns more than two-thirds of Raiffeisen International.

The capital injection comes after Ukraine's central bank asked the largest 17 banks to provide a total of approximately 2.5 billion euros in additional capital by May 1.

Ukraine, together with Hungary and Latvia, is among the Eastern European countries hardest hit by the global crisis. The International Monetary Fund has extended a stabilization loan to Ukraine, but the country's political turmoil and economic difficulties have sparked fears of a possible default on its foreign debt.

"The capitalization of Raiffeisen Bank Aval as compared to other banks in Ukraine is relatively good," said Volodymyr Lavrenchuk, CEO of Raiffeisen Bank Aval, in a statement Monday.

Herbert Stepic, CEO of Raiffeisen International, said that the loan "is further proof of our commitment to and support of our network banks in Central and Eastern Europe."

"Moreover, it may serve as a sign of our confidence, that notwithstanding the current difficulties, the Ukrainian economy and, with it, the Ukrainian financial system will weather this storm," Stepic said in a statement.

After entering the Hungarian market in 1986, Raiffeisen has dramatically expanded its presence in Eastern Europe. Today, it has subsidiaries in 15 countries in the region, ranging from Bulgaria and Albania to Ukraine and Hungary. In Russia, Raiffeisen is the largest international bank. Raiffeisen has no exposure to the three Baltic markets Latvia, Lithuania and Estonia, all of which are seen as vulnerable to further economic troubles.

"We stick to the region, [but], we have also have taken some measures to prepare for this worsening environment," Palzer said. "We unfortunately have to execute staff reduction programs in Ukraine and Hungary."

In Ukraine, the bank will lay off 1,800 people, or 8% of its work force, and in Hungary it will lay off 315 people, or 8% of its work force.

"Some of the risks are by far exaggerated," Palzer said, commenting on the markets' recent reactions to developments in Eastern Europe.

"There's no reason to deny risks and difficulties which we see in the region," he said. "That's why the system banks of the region discussed how to support the region, but a lot of the news I think in the last couple of weeks really deteriorated the situation and led to further divestments of investors in the region. This is a downward spiral which makes the difficulties larger."

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